Week 9

Assuming a perfectly competitive banking system and a binding reserve requirement, what is the ultimate impact on the money supply of a $1 million open market purchase of government bonds by the central bank, given a reserve requirement ratio of 10%, and accounting for possible currency drain with a currency-to-deposit ratio of 20%?

In a scenario where the ECB unexpectedly announces a negative refinancing rate, what would be the most likely immediate effect on the yield curve of Eurozone sovereign bonds, assuming rational expectations and a perceived credible commitment to maintaining this policy?

Assuming the ECB maintains its target M3 growth rate of 4.5%, but empirical data consistently shows deviations exceeding 2 standard deviations, what econometric approach would be most appropriate to model the relationship between M3 growth and Eurozone inflation, accounting for potential structural breaks and endogeneity?

Given the constraints of the Eurozone's single currency and the impossibility of independent monetary policies, how can individual member states most effectively mitigate the adverse effects of an asymmetric economic shock, such as a localized housing market collapse, while remaining compliant with EU fiscal rules and without resorting to currency devaluation?

If the central bank credibly commits to maintaining a fixed exchange rate regime, but faces persistent capital outflows due to deteriorating investor confidence, what combination of policy interventions would be most effective in defending the peg without depleting foreign exchange reserves or undermining domestic financial stability?

Considering the Quantity Theory of Money ($MV = PQ$), and assuming velocity (V) is not constant but varies positively with the interest rate ($V = f(i)$ where $f'(i) > 0$), what is the expected impact on the price level (P) if the central bank increases the money supply (M) while simultaneously keeping the nominal interest rate (i) constant?

Suppose a country's central bank aims to maintain a stable exchange rate with a foreign currency. If the uncovered interest rate parity (UIP) condition holds, and domestic inflation expectations suddenly increase relative to foreign inflation expectations, what policy response would be most effective for the central bank to maintain the exchange rate peg without depleting foreign reserves?

Given a scenario where a central bank targets inflation using a Taylor rule framework, but the estimated natural rate of interest is highly uncertain and subject to frequent revisions, what modification to the Taylor rule would be most appropriate to enhance policy robustness and minimize the risk of policy errors?

In a fractional reserve banking system with a required reserve ratio of 5%, if a bank receives a new deposit of $1,000 and lends out the maximum amount possible, and this process continues infinitely throughout the banking system, what is the total potential increase in the money supply, assuming no currency drain and that all banks maintain zero excess reserves?

Suppose the central bank increases the reserve requirement for all commercial banks. What is the MOST LIKELY INITIAL effect of this policy change on the money supply and short-term interest rates, assuming no immediate offsetting actions by the banks or the public?

If a country experiences a sudden and unexpected surge in capital inflows due to increased foreign investment, what is the MOST LIKELY short-term impact on the exchange rate and the central bank's balance sheet, assuming the central bank intervenes to maintain a stable exchange rate?

Assuming a central bank adopts a policy of quantitative easing (QE) by purchasing long-term government bonds, what is the intended impact on the yield curve and aggregate demand, and what are the potential unintended consequences for financial stability?

If the demand for money becomes perfectly interest-insensitive (vertical money demand curve), what is the impact on the effectiveness of monetary policy in stimulating aggregate demand?

Suppose a country's central bank announces a credible inflation target. If economic agents believe the central bank will successfully achieve this target, what is the MOST LIKELY impact on nominal wage negotiations and long-term bond yields?

Consider a situation where a large number of commercial banks simultaneously face liquidity shortages. Which action by the central bank would be most effective to address this systemic liquidity crisis?

In a situation where a central bank is considering adopting a negative interest rate policy (NIRP), what are the key potential benefits and risks associated with this policy, and under what conditions is it MOST LIKELY to be effective?

Assume a country's central bank is committed to maintaining exchange rate stability within a currency board arrangement. If the country experiences a significant and persistent current account deficit, what policy adjustments are necessary to sustain the currency board, and what are the potential consequences for domestic output and employment?

Suppose a central bank implements forward guidance, communicating its intentions to keep interest rates low for an extended period. If economic agents do not fully believe the central bank's commitment, what are the potential consequences for the effectiveness of monetary policy and the shape of the yield curve?

Under what circumstances might a central bank choose to implement a policy of 'leaning against the wind' (i.e., tightening monetary policy in response to asset price bubbles, even if inflation is stable), and what are the potential risks and benefits of such an approach?

Consider a central bank that uses interest rate swaps as a tool for monetary policy. How does this tool affect the yield curve, and what are the potential advantages and disadvantages compared to traditional open market operations?

What are the primary mechanisms through which the European Central Bank's (ECB) monetary policy decisions are transmitted to the real economy in Eurozone member states, and how do these transmission channels differ across countries with varying financial structures and levels of economic development?

In the context of the Eurozone, what are the key challenges and trade-offs faced by the ECB when setting monetary policy for a diverse group of member states with varying fiscal positions, economic cycles, and levels of competitiveness, and how can these challenges be addressed through alternative policy frameworks?

How does the presence of sovereign debt risk within the Eurozone affect the transmission of ECB monetary policy, and what measures can the ECB take to mitigate the adverse effects of sovereign debt concerns on financial stability and the effectiveness of its policy interventions?

If a central bank decides to implement yield curve control (YCC), targeting specific points along the yield curve, what are the potential implications for the central bank's balance sheet, its credibility, and the overall effectiveness of monetary policy, especially in an environment of rising inflation expectations?

Suppose a central bank is considering implementing a central bank digital currency (CBDC). What are the key potential benefits and risks of a CBDC for monetary policy implementation, financial stability, and the overall efficiency of the payment system, and how do these depend on the specific design features of the CBDC?

If a country abandons a fixed exchange rate regime in favor of a floating exchange rate regime, what are the expected effects on the country's monetary policy autonomy, its vulnerability to external shocks, and the behavior of inflation, and how do these effects depend on the country's financial integration with the rest of the world?

In a small open economy with a high degree of capital mobility, what is the 'impossible trinity' (or trilemma) that constrains policymakers, and what are the implications of this trilemma for the effectiveness of monetary policy under different exchange rate regimes?

Suppose a country's central bank is operating under a dual mandate, aiming to achieve both price stability and full employment. If the economy is experiencing a supply shock that leads to both rising inflation and rising unemployment, what policy response is most appropriate, and what are the potential trade-offs involved in pursuing each objective?

Considering the complexities of monetary policy implementation in an era of low interest rates and unconventional monetary policies, what alternative frameworks or tools could central banks adopt to enhance their effectiveness in managing inflation expectations, stimulating aggregate demand, and ensuring financial stability?

How does the interaction between monetary and fiscal policies affect macroeconomic outcomes, and under what conditions can these policies be complementary or conflicting in their effects on inflation, output, and financial stability?

In an economy characterized by significant uncertainty and Knightian uncertainty, what are the limitations of traditional macroeconomic models and forecasting techniques, and how can policymakers incorporate behavioral insights and robust decision-making approaches to navigate the complexities of monetary policy formulation?

Given the increasing interconnectedness of global financial markets and the proliferation of cross-border capital flows, how can central banks effectively manage the risks of financial contagion and maintain domestic financial stability in the face of external shocks, and what role does international policy coordination play in mitigating these risks?

What are the key differences between rules-based and discretion-based approaches to monetary policy, and under what conditions is each approach most likely to be successful in achieving macroeconomic stability and promoting long-term economic growth?

Under what conditions might a central bank consider implementing helicopter money (i.e., direct distribution of money to the public) as a tool for stimulating aggregate demand, and what are the potential benefits and risks associated with this unconventional policy approach, particularly in terms of its impact on inflation expectations and fiscal sustainability?